The International Credit Transfer, 1992
Recent years have seen considerable growth in cross-border and overseas
banking activities. On the one hand, banks are increasingly seeking to ascertain
subsidiaries, or atleast offices, in countries apart from their own. On the
opposite hand, the commercial activities of banks, specifically funds transfers,
have expanded tremendously. This growth has occurred in terms of both the
quantity of individual payments and also the total amounts "moved" from one
entity to a different entity. The United Nations Commission on International
Trade Law (UNICITRAL) was formed in 1966 by the United Nation's General
However, the Model law on International Credit Transfer was adopted by the
United Nations Commission on International Trade Law (UNICITRAL) in 1992. The
Model law was made as a response to a major change in the means by which funds
were being transferred internationally. The change mainly involved two elements,
that is, the switch from paper based payment orders (through the collection of
cheques and other similar instruments) to more use of payment orders sent
through electronic means and the switch from generalized use of debit transfers
to generalized use of credit transfers.
The Model law is the most useful document of modern times as it offers
opportunity to unify the law of credit transfers by adopting a text that is
drafted in order to meet the needs of modern funds transfer techniques. The 1992
document principally revolves around the rules governing the credit transfer
done internationally and all the payment undertakings by the banks and insurance
companies to back up the obligations of their customers arising under
cross-border transactions. The underlying purpose of these instruments is solely
to improve payment systems and thereby facilitate trade between two or more
Prior To The 1992 Document:
Until the mid-1970s, a person who wished to transfer funds internationally to
waive off his/her obligation or to provide funds to someone in the foreign
country had limited options. Most of these ways involved paper based
transactions like cheques, bills of exchange and other similar instruments.
Furthermore, collection of international bank draft was also one of the most
used ways to transfer funds overseas. However, it was soon realized that such
transmission was time consuming, expensive and slow. Therefore, need for
introduction of other methods of payment was felt internationally and as a
result appropriate steps were taken.
In mid 1970s, introduction of telex transfers and computer-to-computer interbank
telecommunication came into picture and it proved to be cost efficient, speedy
and more accurate. It overcame all the shortcomings of the earlier used methods.
Both of these methods were also preferred because in these methods it is the
originator of the fund transfer who initiates the banking procedures by issuing
a payment order to its own bank to debit its account and then to credit the
account of the beneficiary. Hence, the use of other methods of funds transfer
However, the situation began to change when in 1975 the first international
inter-bank computer-to-computer message system came into service.
Simultaneously, electronic funds transfer system for businesses and for consumer
use started to appear in a number of different countries.
Since, the rules to be
applied on electronic funds transfer were not uniform everywhere, UNICITRAL
started doing efforts in the direction of unification of laws in order to make
uniform rules for all the countries to follow since there were a lot of
differences in the legal rules governing such international transactions. Hence,
it is often said that Model law arose out of the development of electronic
credit transfer systems. The Model law is wider is not limited to banks only and
hence, is wider n scope. This is so because in many countries non-banks operate
a credit transfer services which are directly competitive with the services
offered by the banks.
The UNICITRAL Model law by its own terms only applies to credit transfers and
not debit transfers. Debit transfers do not form part of the Model law even
after they are made electronically. One of the critical factors with regards to
the application of the UNICITRAL Model law is that the credit transfer must be
international in nature. The term credit transfer is defined as the series
of operations, beginning with the originator's payment order, made for the
purpose of placing funds at the disposal of a beneficiary.
It includes any
payment order initiated either by the originator's bank or any intermediary bank
with an intention to carry out the said payment order. Credit transfers are
basically the fund transfers developed by the paying party, who by issuing a
payment order procures the push of funds to the beneficiary through the banking
system. Credit transfer may be made by individuals for personal reasons or by
business houses for commercial reasons.
Many credit transfers require the
services of the originator's bank and the beneficiary's bank. However, it is
possible that sometimes the transactions demand the services of not only these
two banks but also the services of an intermediary bank. The major difference
between debit and credit transfer is that in the latter case it is the
beneficiary who initiates the fund transfer by the paying party.
Model law on The International Credit Transfers, 1992 is often considered as the
most significant instrument on the subject of international credit transfers as
it influences the development of national practices and laws and rules governing
international credit transfers. However, it is in public knowledge that the
growth of credit transfers systems on international level brought the need of
UNICITRAL Model law.
The criterion set out in Model law to know whether a credit transfer is
international and deals with cross-border transactions consequently subject to
the Model Law, is whether any sending bank and any receiving bank in the credit
transfer are in different States or not. Once it is established that the sending
and the receiving bank are in different States, every aspect of the credit
transfer falls within the scope of the Model Law. The credit transfer is said
to be completed when the beneficiary bank accepts the payment order issued by
the payer's bank for the benefit of the beneficiary.
Further, the term acceptance is broadly defined in the Model law but it
may form part of different definitions when the acceptance is made not by the
beneficiary bank but by the receiving bank. But the Model law is silent on the
effect of the payment of funds by the beneficiary's bank to the beneficiary
being 'final and
not conditional upon the funds being transferred by the sender.
Model law is not mandatory a mandatory law. One of the key provisions of Model
law is that the concept of party autonomy applies here too. The parties under
the Model law are free to negotiate their rights and obligations among
themselves by agreement. If the agreement is silent on such issues then the law
of state of the receiving bank shall apply. However, this provision (Article Y)
was deleted from the main text of the Model law at the 1992 UNCITRAL session but
it is there as a footnote for the states that wish to adopt this.
Law Article in India
You May Like
Legal Question & Answers